Law Offices of Vance R. Koven | Latest Blog

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Law Offices of Vance R. Koven | Latest Blog

Software Escrow Clauses: Be Careful Out There

Thursday, May 15, 2014

A discussion in a LinkedIn group I belong to caught my eye today. It was about escrow clauses in software license agreements, with the initiator taking the position that an escrow clause (which typically involves a licensor putting its software in the hands of an escrow agent--there are several who specialize in this--and releasing the source code to the licensee if specified things happen, such as the licensor's bankruptcy, its failure to provide support and maintenance, or other types of contract breach) should be in every license agreement. Well, if you're the licensee, that would be a nice thing to have. A more balanced approach is needed. Since I represent both licensors and licensees, I am admirably positioned to offer one. :-)

Here's what I answered:

Escrow provisions are something that licensees ask for and get when the licensor is *not* a titan (the titan will say that its very size and financial strength are sufficient insurance against insolvency and the other things escrows protect against). As always, relative bargaining position will determine what the licensor must give or what the licensee can expect to get.

If a licensor commits a breach of the agreement, then that's what damages are for. Very few licensees base their whole business on a single piece of purchased software, and a licensee should always be careful to insure that there are other suppliers of software that will do what they need done.

On the other hand, release of software source code is a draconian remedy that could effectively put the licensor out of business (if it's still in business) or prevent the company's being sold to someone who can keep it in business. A licensor should not routinely agree to an escrow, and if it does, it should be very careful what the release conditions are and what the terms of the licensee's continued use of the software will be. Typically, the licensee gets to use source code just to maintain the last version of the software that the licensor provided, and the licensee should be held to high standards of confidentiality in the code.

It might also be well to point out that, at least in the US, a source code release provision triggered by bankruptcy may not be enforceable against a trustee in bankruptcy.